Why Apple Is Losing to Samsung

info@stockcroc.com (Maxwell Fisher)via The Motley Fool

Published 3:00 pm, Sunday, March 3, 2013

Over the past several months, I have been discussing with my fellow investors what I believed to be a protracted sell off of Apple's(NASDAQ: AAPL)stock. In this article, I will make a direct comparison between the two leading cell phone makers, Apple and Samsung (NASDAQOTH: SSNLF).

Up until now, no company has been able to post sales figures for smartphones or tablets that could even come close to matching Apple's. Not Dell, not BlackBerry, not even the venerable Hewlett-Packard or Microsoft (NASDAQ: MSFT). All of that changed when Samsung brought forth the Galaxy S III.

For the first time in history, a company brought forth a product that actually kept pace with Apple's iPhone sales. The fact of the matter is that currently, Apple and Samsung are the only two companies actually turning a profit in the extraordinarily competitive smartphone market. At last report, using fourth quarter earning statements, Apple was still dominating the market with 72% of the earnings, with Samsung earning the rest. The truth behind those numbers is that Apple is losing ground while Samsung continues to gain.

Samsung versus Apple

A key point to remember here is that Samsung, in terms of total revenue, is actually larger than Apple. Samsung reported $183.5 billion in revenue compared to Apples $156.5 billion; however, Apple is still larger in relation to its stock value.

Samsung and Apple could not be farther apart in their business models. While Apple's business model is to create a market and then to dominate the market that they create, Samsung is happy to just sit back, analyze a given market, and then innovate and improve on it.

Samsung did not create the smartphone, but it is certainly innovating and improving on the product. Everything Samsung does is totally opposite of how Apple approaches business. Remember when Steve Jobs said, "Consumers don't know what they want"? Samsung believes that it is the market that drives the need and it is Samsung's job to fill that need.

Even before Apple had released the iPhone 5, Samsung had already been selling its Galaxy Note with a 5.3 screen. While iPhone 5 does boast a larger screen than previous models, it is still smaller than the Galaxy Note. The question begging to be answered is, who is right? It would appear that Samsung is right and its sales figures are showing it.

Another key difference between Apple and Samsung is that Samsung, at its heart, is a manufacturing company. Apple, on the other hand, contracts out assembly. Historically, Samsung has built its business model around developing, producing, and then selling components to other manufacturing companies. By being a major supplier in that chain, Samsung has learned how to compete with and beat some of the biggest names in the industry and has now set its sights on Apple.

Research and development

Furthermore, Samsung is rapidly outspending Apple on research and development. According to recent financials, Samsung is spending approximately $10.5 billion on research and development. This is an astounding 5.7% of revenue. Compare that with Apple, which only spent $3.4 billion or 2.2% of revenue.

How Samsung approaches the research and development process is astounding. They currently employ over 60,000 employees working in 34 research centers around the world; employing sociologists, psychologists, designers and even commonplace people in foreign countries in the hope of spotting a rising trend. Such endeavors, according to Samsung insiders, produced the Galaxy S III.

The irony

Remember earlier in this article where we discussed how Samsung was a major manufacture and supplier of components in the manufacturing process. Apple is one of Samsung's largest customers. Apple buys everything from memory processors to graphic chips from Samsung. Apple is now actively seeking out other vendors but it might be too late for them, considering where Samsung is in terms of market penetration.

The battle

Apple is not unaware of the rising prominence of Samsung, nor the threat that Samsung poses to its market domination. In fact, Apple filed a lawsuit against Samsung and won a $1 billion settlement for patent infringement. While Samsung is appealing the decision, it is a clear indication that Samsung is serious competition.

Apple is already sitting on a record amount of cash with no clear idea of what to do with it. Adding $1 billion to the bottom line only adds to the already existing cash. Samsung gaining a massive advantage in the market place and developing what some would argue to be a better product, is well worth the cost of $1 billion dollars.

The next battle is, according to most experts, going to be in televisions, Samsung's arguably strongest division. Apple is venturing out into dangerous grounds with televisions. Samsung already has massive infrastructure in place and has demonstrated, in the past, an ability to rapidly adjust to changing demands. In 2012 alone, Samsung spent over $21 billion on research and development, tooling equipment and production facilities.

Even more competition

If battling Samsung was not enough, Apple is also facing serious threats from Google and Microsoft.

It is already well established that Google's Android operating system is gaining ground on the Apple iOS. U.S.-based Chitika Analytics reported that "Figures show that in December, Android's share of mobile browsing in North America increased 5.5% to 51.6% while iOS dropped 5.2% to 46.5%."

Microsoft is also making some serious headway with the advent of Windows 8 and its launch of its tablet line of computers, the Surface. With regards to technology and improved performance in tablet computing, the Microsoft Surface is above and beyond any other tablet on the market today that is running the iOS or the Android operating system. According to one report, the Microsoft surface is a game changer.

The bottom line

Remember that just a few months ago, Apple was over $700 per share; it has lost 36% from its high in September 2012. Apple has also slashed orders for the components in its iPhone 5, clearly indicative of waning demand, and the launch of the iPad mini was an unmitigated failure. Without some serious revolutions over at Apple, there is no end in sight for its declining stock price.

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